Tax Question: 2 Partnership returns? Can you split a 1099?

Question

Hey all,

Myself and 2 other partners had a great 2015 starting our rental property business! We have 5 properties all purchased in 2015.

4 Condos-  3 purchased in all 3 of our personal names, 1 purchased in a LLC with the same people.

2 of the 3 purchased in our names were then quit claimed to the LLC (working on getting the last one in there as well). They were in the LLC for about a month of the 6 months owning them.

1 SFH- Title and Mortgage only has 1 partner on it.  He also receives a 1099 from the PM company in his name.

Questions:

1)Do I need to file two partnership returns, one for the LLC and one for the properties purchased in our personal names? 2/3 properties were not in the LLC for most of the time.

2) Can we somehow split the 1099 and mortgage interest on the sfh without causing a red flag?

Hopefully someone on here can help lead me in the right direction. Thank you!

Account Closed · Answer

Does anybody have any advice? Thank you again!!

Linda Weygant · Answer

I'm going to echo @Stephen Chittenden's advice to contact a CPA.  But basically, here are some answers:

1 - You would not file two LLC returns.  You would file one LLC return for the legally created LLC.  If you think about it - how would you file a tax return for an entity that doesn't exist?  For the properties that were purchased in individual names, you'll want to create a financial statement for each property, provide that to each person and they will have to report ONLY their portion on their tax return.

2 - You can't really split a 1098 for mortgage interest.  For whomever's SSN the 1098 is reported in, that person should report ONLY THEIR PORTION of the mortgage interest on line 12 of Schedule E.  The rest of the people will report ONLY THEIR PORTION of the interest on line 13 of Schedule E or you're likely to get a matching letter from the IRS a few years down the road.

The IRS says:Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible.

But if you claim mortgage interest when the 1098 isn't issued in your SSN, it causes data matching issues which is why I recommend reporting on line 13 for Other Interest rather than on line 12 for Mortgage Interest.

You should also technically create a document or statement indicating that all partners understand that the mortgage expenses, including mortgage interest, are payable out of the rental income BEFORE distributions of profit are made.  That way, you're showing the partners are required to pay the interest.  Without this, establishing that you are allowed to take the interest deduction can be problematic as the ability to take interest is established two fold - 1) the interest is actually paid by you.  2) you were obligated to pay the interest.

Stephen Chittenden · Answer

You need an accountant.  You cannot split the 1099 as you propose, but there are ways to deal with this.  A good accountant can help you. I can't recommend that you try to do this on your own, as the way you have started your business have made this more complicated than you can probably handle on your own.